Gold – The Good, The Bad And The Ugly.

People in banking are pretty rational unless you talk to them about Football or Gold.
Gold is a controversial topic, and there are a lot of misconceptions about Gold and facts that may surprise you. Some investors avoid it, since it does not generate any yield. But quite a few traders I worked with allocate a substantial amount of their savings to Gold.
If we don’t subscribe to the doom predictions of gold bugs and take emotions out of the equation, where is the logic? Is buying Gold a wise choice?
KEY TAKEAWAYS
- It’s risky. Owning Gold is riskier than you think. It can be a very volatile asset on its own.
- It may disappoint, when you need it the most. Gold is also prone to short term sell-offs during a crisis at exactly the same time as Stocks. This is due to market-wide liquidations.
- But surprisingly, it works well in a portfolio. Gold works well within a diversified Portfolio and offers good diversification with no correlation to stocks in the long term.
- Gold reacts well during longer stress periods. At times when stocks underperform.
- An insurance has an opportunity cost. It’s similar with Gold. It may hedge long periods of hyperinflation, or a global, but not catastrophic, war. In between, Gold can underperform for decades, since it doesn’t generate any yield.
- Its price fluctuation may look unintuitive. That’s because it usually tracks the opportunity cost of holding a much better diversifier to your Equity portfolio – Bonds. And sometimes, hyperinflation.
Here is the full analysis
When you have gold you’re communicating all the different things you’re capable of. Mastering supply routes, commanding an army, scientific endeavour, marshalling labour, etc. Gold, then, is a very specific proof of work.
Joe Weisenthal
Bankers' Ultimate Currency
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As with all currencies, Gold has no yield on its own
A Bloomberg Terminal used by Bankers and asset classes on its keyboard


To marginal degree - a commodity
For the finance community, Gold is the ultimate currency. In fact, on Wall Street when you use a a Bloomberg terminal you must press ‘Currency’ after typing the Gold ticker to get information about it or its latest price.
For Aswath Damodaran, “Gold’s value has more to do with its longstanding function as a store of value, especially during crises or when you lose faith in paper currencies, it is more currency than a commodity”.
Gold’s value as a commodity in industrial processes is marginal According to the World Gold Council’s data, it accounts only for about 17.5 per cent of the total demand for gold.
Holding Gold shows your capabilities
Joe Weisenthal, from Bloomberg has in my opinion summarised the historical importance of Gold in the best way. Here is his take. One of the striking things about gold is just how incredibly hard it is to attain. And hold onto it once you have it.
To get Gold, you have to:
- Be good at warfare
- Be able to marshall an extensive human workforce to mine it
- Achieve mastery of global supply and logistics routes
- Be able to command guards who will watch your gold, and not steal it
- Have the technical know-how to get gold out of the ground, which is expensive and
cumbersome
When you have gold you’re communicating all the different things you’re capable of. Mastering supply routes, commanding an army, scientific endeavour, marshalling labour, etc. Gold, then, is a very specific proof of work.
If you can get gold, you’ve proven that you have the ability to run a state or some state-like entity.
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Sometimes individual sessions are very helpful to get past your investing concerns. Our readers asked us to create coaching sessions. And we’re proud to say, that some of them even ditched their Financial Advisors, after experiencing the value we provide.
Most coaching participants come from the EU or the UK.
But we have consistent demand from all around the world. We provided coaching sessions to individual investors stretching from Argentina to New Zealand, or Guatemala to Japan.
A significant part of our clients are professionals in the Tech sector, Lawyers or Doctors that want to avoid costly mistakes when investing.
We also coach 25-30 year old young professionals that want to maximise assets for early retirement. We also have a large group of entrepreneurs that e.g. receive large lump sums after selling their company and want to invest it in financial markets. We speak to Crypto millionaires that want to reduce their risks.
Finally, some of our coaching clients are in their 40s or 50s and want to set up customised, income-producing portfolios or create Bond ladders for their retirement.
Most of the coached investors are in the 25–60 year old range.
Yes, some of our coaching clients have shared reviews on Google.
Some considerations are included below. For more details, consult your regulator’s website.
A financial coach is:
- Trained but not regulated
- Skilled at reviewing your overall financial situation and goals
- Able to help you develop a financial plan to achieve those goals
- Happy to discuss the pros and cons of various financial products but can’t recommend a specific one for you
- Comfortable working with anyone, whatever their situation
- Going to charge for their time
A financial adviser is:
- Regulated and authorised by the regulator to recommend specific products to clients or is independent and able to offer ‘whole of market’ solutions
- Often, going to charge an annual management fee, typically 1-2% of their client’s assets with initial fees on top.
We are proud to say that our coaching service has empowered a number of clients to reconsider their financial advisers’ offerings. From our clients’ feedback, in a number of cases, clients were overcharged, and offered unsuitable products, often due to conflicts of interest. However, this is not a rule. The best choice between a financial coach and adviser depends on an individual’s unique circumstances, including their financial literacy, time availability, comfort with managing their finances, and complexity of their financial situation.
Beginners often ask us:
- How do I reach my goals – What investments do I need to take into consideration for e.g. Taking a Sabbatical, buying a House or saving for Early Retirement?
- When should I invest – I fear that investing a lump sum in this market may have a negative impact on my returns. How can timing of buying ETFs affect my performance?
- How do I Invest – What are the pro and cons of investing with a Bank? Why should I diversify brokers?
- What should I consider investing in – What are some risks of portfolio diversifiers like Gold or Crypto?
- Avoiding Extra Costs – I have shortlisted a few ETFs, can you help me to compare them before I decide which one to buy?
- Benchmarking – What are educated investors doing in a similar situation to mine?
We are flexible. For example, answering some of these questions could help you avoid very costly mistakes:
- Challenging My Portfolio – Here is my portfolio – what am I missing? What could derail my strategy?
- Accelerating My Understanding – What are inflation linked Bonds? How are they different to Nominal Bond ETFs? What makes them outperform? Why do some investors add small cap value stocks to their portfolios? I want to exclude Tobacco companies from my portfolio – what are my options? What is Factor Investing?
- Simplifying Portfolio Maintenance – How can I diversify my investments? What is historically highly correlated so that I can consider removing it to keep my portfolio simple? How do I perform rebalancing? Does frequency matter?
- Reducing Risks – I want to understand the risks of investments – what are the different measures and how does it impact me? What are the risks of different types of brokerage accounts?
- Understanding the Impact of Recent Events – How do recent events impact my portfolio? What can I do to protect my savings from shocks?
- Investing Goals – I am investing for a specific goal e.g. Early Retirement, what is the research saying about e.g. the amount I need to have accumulated, how much can I withdraw annually? What are some calculators available and how to run them? What are the assumptions/shortcomings of these models?
- Comparing Equivalent ETFs – I have certain constraints in my tax-wrapper and can only select certain funds (e.g. I live in France and limited to specific synthetic ETFs). Which ETF characteristics should I pay attention to?
The Bad - Gold is Risky
As with all currencies, Gold has no yield on its own
- Unlike bonds, gold does not pay interest. Nor will you receive ETF dividends.
- This perceived lack of yield often deters some investors.
- You also need to account for storage costs.
How volatile is Gold?
- Despite popular beliefs Gold is inherently risky. Especially for people that don’t diversify enough and have a high concentration of their wealth in Gold.
- On its own, Gold is a volatile asset. If held for 5 years you could still have faced up to a 40% loss on several occasions over the past 3 decades.
- The below graph illustrates Profit and Loss on $1,000 invested in Gold and held for 5 years.
If the stock market crashes will Gold go up?
Not in the short term.
You can see that there is a short term sell-off period for Gold in the middle of the GFC (circled in yellow below). Liquidations of other assets have a short term impact on Gold.
However, Gold acted as a great long term Equity hedge. It has returned up to 280% in 2010/11 if bought 5 years earlier and held for that same 5 year period.
In the long term, more often than not a crisis comes with at least one of five risk factors listed below acting as a positive catalyst for Gold prices.
It is frequently either geopolitical tensions, deflation, expectations of very high inflation or a weaker USD.
Net Profit & Loss at the moment of sale on $1,000 invested in Gold 5 Years earlier
The Ugly - Gold can underperform for decades
Is Gold a good investment for the Long Term?
- In short, no. In fact, I think it’s a stretch to call it an investment, similar to other currencies. I would rather call it a diversifier.
- Price moves are of course even more extreme if you invested at the top of the market. It’s a great way of looking at what losses you can sustain if looking at Gold in isolation. Especially in the long run. Below is the graph representing scenarios where you would have invested at market peaks.
- The below graph gives you a long term perspective on how Gold can have decade-long under-performance, starting in the 1980s when Gold peaked.
- It subsequently recovered from 2000 onwards and peaked again in 2011.
- Recently, Gold has rallied since mid-2018.
Lost decades. Net Profit & Loss on $1,000 invested in Gold from its previous market peak
If you don't own gold...there is no sensible reason other than you don't know the history or you don't know the economics of it.
Ray Dalio
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The Good - Gold in a Portfolio works well
Does Gold have a place in a Long Term Portfolio?
- Gold provides very good diversification benefits. It is only inferior to Treasuries but if yields are low, holding Gold (and other diversifiers like Bitcoin) has low opportunity costs.
- While Gold is volatile on its own, within a portfolio with Equities and Bonds, a small allocation may improve the risk/return profile of your portfolio.
- There will be scenarios where other asset classes will underperform and you may use proceeds from Gold to purchase cheaper assets that generate dividends.
- Gold may help you to rebalance your portfolio in certain crisis scenarios but this may not be as immediate as Bonds due to market-wide asset liquidations.
- Read what diversification means and how to read the below table.
Gold Portfolio Diversification Benefits 1999-2019
Here is a guide on how to select assets for your portfolio. Simplify your portfolio by following these allocation strategies to improve the performance and time you need to dedicate to portfolio management. Understand how to clean up your portfolio from asset classes you don’t need.
In combination with Bonds
Can Gold replace Bonds in a Portfolio?
Net Return on $1,000 from a 70% International Equity Portfolio and 30% Gold or Bonds over 5 years at time of sale
- The above chart represents a return in USD, before fees, from holding a 70% Equity 30% Bonds or Gold Portfolio over 5 years at the time of selling the investments. It assumes a 5-year holding period.
- Bonds provided better overall returns up until the Global Financial Crisis but since then Gold resulted in higher Portfolio returns.
- Remember, that Gold is much more volatile (15% standard deviation vs. 3.5% for Bonds) and your overall portfolio risk in the example above increased as well.
- In summary, you should have both Bonds and Gold in your portfolio since the protection benefits do not kick in at the same time depending on the type of market events.
Here is a guide on how to construct a Long Term Portfolio.
WHAT MAKES Gold so volatile?
Here is the paradox. To put it mildly, it’s not an attractive asset. But it still makes sense to own it.
You don’t have to understand the technical details to be able to benefit from Gold. In fact, diversification is all that matters.
However, it’s good to have an understanding of what really makes it a different asset and when you may need it. Let’s have a look at some price drivers.
$100 bn of Gold trades daily, mostly in London and as a financial product. As you would have guessed it, the first four factors are predominately financial in nature.
ADDENDUM - MAIN 5 Gold Price Drivers
- Opportunity Cost
- Dollar StrengTH
- Macro AND GEOPOLITICAL Shocks
- HYPERInflation
- Demand from Retail OR Central Banks
#1 Opportunity Cost
What is the opportunity cost of holding Gold?
Low Real Interest rates are the elephant in the room when it comes to explaining what drives most of Gold price.
Investors are turning to gold because of one simple fact – deeply negative Real Yields. These are Bond Yields after accounting for Inflation.
The more Treasury Bonds are generating negative real returns the more attractive Gold becomes. After all, buying a bond that is guaranteed to lose you money is a tough sell.
Gold Moved With Real Yields FOR TWO DECADES

According to a BlackRock analysis Real Yields explain around 30% of the price of Gold. The strongest factor, by far. But it is not true in all environments when other price drivers take over.
We could break it also down into three periods:
- 1982-1999 (High Real Yields)
- 2000-2008 (Decreasing Real Yields) and
- 2009-2019 (Low Real Yields)
In the first two periods when Bonds offered positive or high real returns there was low relationship between Gold and Real Yields.
It may be the case again if Real Rates go up one day.
That said, in the current low yield environment there is a correlation between rates and Gold prices.
Gold follows Real Yields closely
BlackRock estimates that a rule of thumb is that every 0.10% drop in Real Yields coincides with about a 1.25% increase in Gold Prices.
Real Rates are already low hence any potential coming from Rates is by definition limited.
How Can I track the opportunity cost of holding Gold?
You can easily track daily Real Rates from the US Department of Treasury website or the FED. The lower the rates the lower the opportunity cost of holding Gold and higher its price.
#2 Dollar strenght
Why does Dollar strenght impact Gold Price?
This reason is mechanical – Gold is quoted in US Dollars.
- Historically Gold outperformance is strongest when the Dollar is weak. It’s valid over long periods. During Coronavirus both the Dollar and Gold were perceived as Safe Havens and a stronger dollar didn’t have a major impact on Gold. This may revert as the Economy stabilizes.
- Monetary Inflation increases prices of all assets including Stocks and Gold on the back of unprecedented stimulus by the FED which will make the USD relatively weaker (Price inflation of Real Assets since these are quoted in USD)
How can you track Dollar strength?
You can easily track USD Strength vs. major currencies (predominately the Euro) by following the Dollar Index (DXY).
Essentially, this tracks how strong is the USD versus a basket of other currencies. A stronger Dollar vis-a-vis other currencies may mechanically weaken Gold.
#3 Macro AND GEOPOLITICAL Shocks
As you may have observed in H1’20, each Jobless claim on Thursday came with a surge in Gold Prices.
Other important macroeconomic indicators had similar effects. That said, gold reacts negatively to a more positive outlook.
Any potential Geopolitical or Economic Conflict (e.g. recent developments in Ukraine, trade wars or potential escalation around Taiwan) may also impact Gold and provide a hedge to your Equity portfolio.
There is also a possibility of other Tail Risks combined with the current situation. Just rremember how the Oil Price War escalated. We can’t predict the exact nature of the event but Gold is an insurance policy in these instances.
I hate gold and I have always hated gold. Unfortunately, I own gold. I think I have two fears. One fear is deflation and one fear is inflation and I have learned through history that there is no such thing as inflation anymore.There is hyperinflation or nothing. Now we are in a deflationary environment. It can switch very easily from there because there is so much money out there. So I want to hedge and make sure my funds and my savings are unaffected by both deflation or hyperinflation
Nassim Nicholas Taleb
#4 HYPERInflation
Gold rally in the 1970s

Gold 'invisible' Rally in 2023

How high must the inflation rise to benefit Gold?
You may be surprised to see inflation only listed as #4. And even then it comes with a big caveat.
In terms of inflation regimes, average Gold returns have generally been most significant during extremely low, less than 1%, or high, greater than 4%, inflation, and this for a long time period.
Is it a good time to buy Gold with inflation between 1% and 4%?
Contrary to popular belief, in those cases Gold is not a good inflation hedge.
In those episodes gold returns were lacklustre (pun intended).
When the 60/40 (Stocks/Bond) Portfolio Needs help
In essence, we would need to see a significant jump in inflation for Gold to benefit materially.
The 1970s illustrate that relationship. Back then, the real price of imported oil in the U.S. increased 6-fold, leading to runaway inflation and stagnant economic growth.
Later, as inflation accelerated, bond-heavy portfolios suffered as well, declining up to 40% by 1981 (inflation-adjusted chart below).
Note that I used a separate axis (right) for Gold since it is so much more volatile compared to Bonds and Stocks (acts as hedge)
Oil And Inflation Shocks Of The 1970s
This has not been the case post the GFC when gold has been frustrating to trade.
The prediction that drove the post-crisis rally, that quantitative easing would lead to high inflation, did not play out.
Gold tumbled to below $1,100 by late 2015. Bears can also point to the two-decade slump that followed a high in 1980.
How can you track Inflation Expectations?
One of the ways of tracking medium-term inflation is using FED’s 5-year breakeven inflation rate.
This graph will show you the expected annualized inflation over the next 5 years.
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#5 Commodity, Retail and Central Bank Demand
Gold has a traditional supply/demand market as a commodity, in technology, jewellery or protective asset demand from Retail and Central Banks. Retail is largely driven by Emerging Countries and more specifically Asia. 50% of overall Gold demand comes from China and India.
Despite initial signalling Emerging Countries are likely to continue the long term trend for central banks to be net buyers of Gold post-GFC.
How can you track World Gold Demand?
One of ways of tracking demand is through the World Gold Council website and its quarterly reports.
Research the appropriate ETFs based on your needs
- If you decide to invest in Gold you may consider physical gold or a gold ETF.
- Only consider Gold in a diversified Portfolio (Read how can Gold fit in a Long Term Portfolio).
- An investment in gold is easily done with listed products, like ETFs or ETCs (How are they different?). These investment products track the spot gold price closely, after taking management and storage fees into account.
- Performance vary by currency. Gold is quoted in USD and then converged into Fund’s Reporting Currency.
- I have not included leveraged Funds (understand their risks).
- Check the size of the fund and liquidity. It is usually preferable to stick to the larger vehicles that are more liquid (why liquidity matters).
- Low fees are the most cost-effective feature of an ETF – make sure you select a low fee vehicle.
Gold ETFs by Exchange
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